A Kentucky bad faith insurance practices lawsuit has certain elements, although the factual particulars, of course, will vary from case to case. The decision by the Kentucky Supreme Court last summer and its case, Indiana Insurance Company v. Demetre presents these elements and the Court's analysis shows why they are key to a successful bad-faith insurance lawsuit.

The Basic Facts that Led to the Insured's Claim:

James Demetre came to own in 2000 property in Campbell County that had once been the site of a gas station. The gas station was long gone, however, having ceased operation sometime in the early 1960s. In 1998, the station's underground gasoline storage tanks were removed, the building torn down and all the materials hauled away. Although the gasoline storage tanks had been removed, the state's Department for Environmental Protection continued to monitor the property for some time.

Demetre sought insurance coverage from Indiana Insurance. In 2006, he bought coverage for his condominium and an automobile, while also obtaining umbrella liability coverage.

In April 2008, Demetre sought coverage for the Campbell County property from Indiana Insurance. He told its agent that the lot had once been the site of a gas station. In deposition testimony, the agent confirmed that she had informed Indiana Insurance's underwriting department that the lot had been used as a gas station. The Campbell County lot was added to Demetre's liability coverage in April 2008.

A few months later, in September 2008, Demetre received a letter from an attorney representing the Harris family, which lived in a house on a lot abutting the Campbell County property. The lawyer's letter alleged that members of the Harris family had been injured by gasoline emissions from the property causing "significant medical damages" and dimunition of the fair market value of the residence. Demetre promptly notified Indiana Insurance of the Harris family's claims.

So here's where the case starts: the insured has made a claim for insurance coverage for precisely the type of event that led him to seek the coverage in the first place.

The Insurance Company's Response: Investigate the Insured Not the Claim

Indiana Insurance began almost immediately looking for a way to get out of providing the coverage that Demetre had paid for and had now claimed. A claims adjuster was assigned to Demetre's claim, and the adjuster notified the company's Special Claims Unit, which in 88 minutes sent back an email stating that "it appears there may not be coverage under the Insured's condo policy."

A few weeks later, the claims adjuster sent Demetre a letter stating that Indiana Insurance question whether Demetre's policy covered the claims apparently being asserted by the Harris family. So what the adjuster did was tell Demetre it was provisionally providing coverage "under a reservation of rights." Although the adjuster was telling the insured that the company had doubts about whether he has policy provided coverage for the claims, the adjuster was advising his colleagues by internal e-mail that "I don't know what claims are being made against the insured by the attorney."

A Key Point: when an insurance company states that it is providing coverage under a "reservation of rights" it means at least that the insurance company has not yet, but is still looking for a way to get out of providing coverage.

Claiming to be Unsure Whether Coverage Exists and Ignorance about the Claims, the Insurance Company Investigates Its Insured Rather Than the Claim

Indiana Insurance's next step was to interview the insured, Demetre, and investigate the Campbell County property, and investigation that included groundwater monitoring and compilation of other environmental records, information and data. "These efforts," The Court observed, "were directed to determining whether Demetre knew of the Harris family's claims before the Campbell County property was added to Demetre's insurance policy." Indiana Insurance was working hard to get out of providing coverage for the claim, reflexively, it would appear, since it had little idea or conception about the claim or its basis.

The Court observed regarding the claims adjuster's actions: "While [the claims adjuster] thoroughly investigated Demetre, his investigation of the Harris family's claims was practically non-existent." The claims adjuster made no effort to interview the Harris family members, request medical records, seek medical exams, inspect or sample the soil near the Harris residence or otherwise determine the validity of the claims being asserted against Demetre.

Nevertheless, and despite the absence of any effort to actually investigate the claims being made against Demetre, the claims adjuster lied to him, stating, "please recall that we are investigating the claims being made by Ms. Harris and her family," while also reminding Demetre that Indiana Insurance company continues to handle the claim "under a reservation of rights."

The claims adjuster having done nothing to investigate the claim was replaced. The new claims adjuster did likewise. The second claims adjuster, Glardon, "admitted to doing nothing to protect Demetre's interests during her handling of the case file." Even after Demetre was sued by the Harris family and Glardon had a lawyer hired to defend Demetre, she never bothered to speak with either the lawyer or to Demetre.

Glardon was replaced by a third claims adjuster, Magi, whom, the Court noted, closed "72% of his assigned insurance claims without paying any money to claimants" and succeeded in dragging out claims interminably, because, where money was paid it took 10 years in 31% of the claims.

Although Magi had an expert analysis done and an attorney indicated that the Harris family's claims appeared unfounded, "Magi seemingly focused his full attention on attempting to deny coverage." In December 2009, 15 months after Demetre made his claim, Magi sent another reservation of rights letter, indicating that the insurance company still had not determined whether there was coverage or not.

Finally, in September 2011 more than three years after Demetre first notified Indiana Insurance of the Harris family's claims and two years after the Harris family sued Demetre, depositions were taken, medical records, obtained medical exams performed and inspections of the Harris property and residence performed. This led to the conclusion that the Harris family's claims were unfounded; nevertheless, Indianan Insurance paid $165,000 to settle their claims.

This left Demetre's bad faith claim against Indiana Insurance. We'll review that in Part 2 of this post.